Incentives, Goals and Labor Supply: An Experimental Investigation

Abstract

Incentives are the essence of economics, and the question of how workers’ choices of effort and work hours respond to financial incentives is among the oldest questions in labor economics. Many efforts have already been devoted to understanding the determinants of labor supply. This paper aims to investigate the determinants of labor supply under risk by employing a series of real effort lab experiments. Subjects could choose both the work time and effort in one treatment and could only choose the effort in another treatment in a three-days experiment. The results show that, consistent with predictions of neoclassical model, most subjects in provided more efforts as the piece rate increased, indicating a significant substitution effect. However, inconsistent with predictions of neoclassical model and behavioral model based on prospect theory taking status quo as reference point, most subjects provided at least no less effort even when they faced a risk on getting their accumulated piece rate earnings. However, multiple-reference points theory which suggests that to be success is a more important motivation than loss aversion seems fitted the data better.